Should I Buy TWTR Stock? 3 Pros, 3 Cons

Social media stocks are hot, but Twitter stock is risky

Twitter (TWTR) priced its IPO at $26 per share. In its first day of trading, TWTR stock gained 73%. That’s well above the average first-day return of 17% for IPOs in 2013.

Since then Twitter stock has lost 11% … but it remains solidly up over 50% from the TWTR IPO price.

So is Twitter a dud or a stud all in all? And should you buy TWTR stock? Let’s take a look at the pros and cons.

Pros on TWTR Stock

Social media stocks. This group did very well in the third quarter. The Global X Social Media ETF (SOCL) was up 33% from the beginning of July through the end of September. There are few industries today where investors can buy significant future growth; social media is one of them. TWTR stock is one of SOCL’s 28 social media holdings with a weighting of 4.12%. Year-to-date SOCL is up 46%, 18 percentage points higher than the S&P 500. Momentum investing is hot and TWTR is a big part of that.

Mobile is its future. In the three months ended Sep. 30, TWTR generated over 70% of its ad revenue from mobile devices. That compares with just 49% for Facebook (FB). In terms of its monthly active users (MAUs), 76% access Twitter from a mobile device. That good news since, between 2012 and 2017, the global mobile advertising market is expected to grow by 39% compounded annually. By 2017, the online advertising market will be $125 billion. Considering TWTR currently accounts for less than 1% of it, the potential is tremendous. TWTR stock could reap the benefit.

Losing money. Taking the contrarian view, one could argue that a lack of profitability is not a bad thing for TWTR stock investors over the long haul. See, Twitter is considerably smaller than either FB or Google (GOOG) when they went public. FB was at $1.47 billion in revenue in 2012 and GOOG was at $3.71 billion in revenue in 2004. Both were making money at the time … which of course TWTR is not. Let’s say Twitter reduces its research and development costs (they currently make up 47% of overall revenue) to around 15% (about the average for Facebook over the last few years) in the next fiscal year. If it can then continue to grow revenue at more than 100% annually, Twitter will be making money without cutting in any other area. That’s the upside for TWTR stock.

Cons on TWTR Stock

Size counts. TWTR stock is the underdog in the social media fight. Twitter currently has approximately 232 million MAUs compared to 1.2 billion for Facebook today and 901 million when FB went public in May 2013. In the 12 months ended Sept. 30, FB still grew its MAUs by 18% year-over-year … not as much as younger Twitter, but still good growth for a company that’s been around for a while. Even more impressive is the fact 874 million of those MAUs are mobile in nature. Advertisers like reach. FB is big competition for TWTR, and it has size in its corner.

Globally impaired. Twitter has a conundrum — and one that could weigh on TWTR stock. While 77% of Twitter’s average MAUs are outside the U.S., only 26% of its revenue comes from advertisers outside this country. Facebook, on the other hand, has 83% of its MAUs outside Canada and the U.S. (Facebook combines Canada with U.S., Twitter doesn’t) with its international revenue accounting for 53% of its overall total. While it’s clear U.S. advertising is the key to most social media-driven vehicles, Twitter’s business model seems upside down. That might not bode well for TWTR stock down the road.

Valuation. IPO guru Tom Taulli does a nice job explaining why TWTR stock could plunge between 40% and 80% in the coming months due to an excessive valuation. At 41 times revenue, not a lot can go wrong with Twitter’s growth story before TWTR stock investors get jittery. One bad report and the markets will most certainly react. In addition, you can currently buy FB stock at 16 times revenue and it’s the reigning champion of social media; not to mention far more profitable. Why roll the dice with TWTR stock when you can buy FB stock with certainty?

Verdict on TWTR Stock

Personally, I like Twitter. Not because I use it much — I generally only use it to comment on a stock I’ve recommended in the past that’s made a big move up or down — but because it’s a darn effective as a communication tool.

But potential TWTR stock investors must weigh the oddities with advertising (I personally have never noticed ads on the site, and that strikes me as a problem) and a valuation that’s out of this world. Especially in a market environment that some feel is overheated, Twitter stock seems to have the makings of a bloodbath.

So should you buy TWTR stock? I don’t think so. Maybe when and if it drops below $30 — closer to Twitter’s IPO price.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Based in Silicon Valley, Tom Taulli is in the heart of IPO land. On a regular basis, he talks with many of the top tech CEOs and founders trying to find the next hot deals and finding out which start-ups are stinkers.

A long-time follower of the IPO scene, back in 1999 Tom started one of the first sites in the space called WebIPO. It was a place where investors got research as well as access to deals for the dot-com boom. Tom also wrote the top-selling book, Investing in IPOs. In it, he covers all the aspects of analyzing an IPO, such as reading the prospectus, detecting the risk factors and understanding some of the arcane regulations. But don’t worry — if that process is too intimidating for you, thankfully Tom will do the legwork for you right here in the IPO Playbook blog.

Tom is routinely quoted in the media about upcoming deals with his interviews on CNBC and Bloomberg TV, but he is eager to take your questions too. You can message him on Twitter at @ttaulli. And feel free to weigh in via the comments section on any of his IPO Playbook posts.